The IMF delivered a ringing endorsement overnight to Joe Hockey’s campaign for an overhaul of banking regulation.
Contrary to a nonsensical report from AAP, which claimed the Fund had “slapped down” Hockey, the IMF’s latest report on Australia addresses some of the exact issues Hockey has been raising.
“Given the relatively good performance of banks in the face of the crisis, staff expressed concern that they may be emboldened to take on riskier strategies. The global crisis highlighted the need for banks to hold strong capital and liquidity buffers and for supervisors to encourage banks to carefully manage their risks.”
That’s about as blunt a summation of Hockey’s position on the need to rein in banks’ desire to become growth stocks as you can get. And the Fund repeats it later in the document: “Banks remain sound but the authorities should remain vigilant as banks could adopt riskier strategies.”
The Fund also stresses an issue Hockey dwelt on last Monday in his AIG speech, when he discussed the “mismatch between short-term deposits and the three to five-year wholesale debt that banks primarily use to fund their credit creation activities, and the much longer term — up to 25 year — loans they extend to their customers, which gives rise to the liquidity and solvency risks that necessitate an underlying system of public support for all banks.”
“Disruptions in global capital markets could put significant pressure on Australian banks because of their short-term offshore funding,” the Fund warned, going on to say “staff advised that APRA encourage banks to rely more on medium and long-term funding.”
The Fund comments — reflecting extensive input from Treasury — show how absurd the jibes of ‘populism’ directed at Hockey are. These are mainstream concerns, backed by key regulators, respected economists and even some industry players.
Mike Smith of ANZ went further than populism, though, comparing Hockey to Huge Chavez and reaching for that badly-overused lament of “sovereign risk” — a term that now appears to mean any example of a politician failing to tug the forelock sufficiently to large corporations. Smith deliberately set out to intimidate a politician who had dared to step outside the bank-manufactured consensus about financial regulation.
ANZ is directly in Hockey’s firing line. It is less than a month since chairman John Morschel boasted that ANZ was a “growth stock” because of its “supra-regional strategy” in Asia: “Otherwise we would have become a yield stock and if that happens your share price can suffer.”
ANZ’s “supra-regional strategy” in pursuit of being a “growth stock” — exactly the sort of “riskier strategy” the IMF is talking about — is underwritten by a lack of competition in domestic lending, shameless fee gouging and a de facto government guarantee, based on the simple reality that ANZ, along with the other members of the banking cartel, is too big to be allowed to fail. As the IMF noted, we saw that in action during the GFC, despite our financial regulatory system supposedly being based on the principle that no part of the financial sector is guaranteed.
This isn’t just about a banking oligopoly making super-profits by gouging customers and jacking up interest rates more than their borrowing costs warrant. This is about increasing the exposure to risk of entities that, unlike most of corporate Australia, are simply too systemically important to be allowed to fail. That’s what the critics accusing Hockey of populism and “out there proposals” don’t understand — or, much more likely, understand perfectly well but find it convenient to ignore.
For Smith, the stakes are high — his remuneration is linked to making ANZ a “growth stock”. But for the Australia economy, the stakes if (or, based on the overseas experiences of other Australian banks, when) ANZ gets it wrong are far higher. Smith’s comments, by the way, are at odds even with the Australian Bankers’ Association, which rejected Hockey’s call for ACCC powers to investigate collusive price signalling but declared the rest of Hockey’s agenda was worthy of consideration.
The only success Hockey has had so far is in the launch of a Senate inquiry. Senate inquiries won’t do anything unless they’re backed by the government — and particularly not if it focuses on annoying but systemically trivial issues like ATM fees. Wayne Swan’s continuing refusal to take Hockey’s proposals seriously is a staggering example of either partisan politicking at its basest or industry capture, or perhaps both. That it is coming from a Labor Treasurer is all the more remarkable.
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